CP Rail's 'nice guy' CEO faces reckoning
Canadian Pacific president and CEO Fred Green. (DAVID BLOOM/QMI AGENCY)
If Fred Green has an Achilles’ heel as leader of industry-laggard Canadian Pacific Railway , it may be the quintessential Canadian qualities of good manners and kindness.
Many question whether Green - squarely in the crosshairs of activist investor William Ackman - is ruthless enough to overhaul the storied railroad to make it more efficient and profitable.
A CP lifer who is uniformly described as a decent, kind and just a plain nice guy, Green has largely stayed out of the ring during the fight of his corporate life.
The native of tiny Stephenville Crossing, Newfoundland, has declined media interviews and public presentations, and has conducted his campaign to keep his job by meeting with CP’s shareholders behind closed doors.
It’s a low-profile campaign that mirrors Green’s management style during his five years at the top of Canada’s second-biggest railroad.
But events have forced a change of tack by the 55-year-old Green. On Tuesday, CP will host an open meeting in Toronto to provide more details to shareholders on how it plans to make the country’s No. 2 railway more efficient. In a rare public forum, Green will take center stage to counter the arguments put forth by the man who wants him to be sacked.
Ackman, whose Pershing Square Capital Management hedge fund has a 14.2% stake in CP, wants to replace Green with former Canadian National Railway boss Hunter Harrison, a plain-spoken Memphis native who promises to shake up the company culture in a push for productivity.
The showdown will come at CP’s annual shareholders meeting on May 17.
“It’s almost stereotypically Canadian versus U.S.,” said independent railway analyst Tony Hatch, who has followed the sector for 25 years.
“The U.S. cowboy comes in very self-assured, and willing to share that with you, versus a more reticent, polite, nice - not that these are bad things - Canadian model.”
The board at CP, which completed the first railway link to Canada’s Pacific Coast from the more populous East in 1885, has bristled against what it calls Ackman’s vague plan for improvement. It has backed Green and his remedy for fixing what is currently the worst operating performance among North America’s Big Six railroads.
CP’s operating ratio - the percentage of revenue needed to operate the railway - stands at 81.3%. CN, which made many of its efficiency gains under Harrison, has a 63.5% operating ratio, the best in North America.
Green, married for 30 years and father of two adults, has promised to reach 70% to 72% in 2014, while Harrison pledges to hit 65% by 2015.
Ackman, who wooed CP investors at a well-publicized Toronto town hall meeting in January, plays up Harrison’s legendary corporate turnarounds, the result of a heavy-handed, detail-oriented approach.
Green, on the other hand, faces challenges in overhauling CP because he is an insider, said Trains magazine writer Fred Frailey.
“I think part of him is very proud of Canadian Pacific’s role in Canadian history and he’s interested in preserving that,” said Frailey, who has covered the industry for 34 years.
“So it’s tough. I just don’t think he’s been willing to be ruthless enough in terms of changing, I guess you’d call it the good old boy culture, particularly in the operating department.”
Reached for comment, CP Chairman John Cleghorn repeated that Green and his plan to improve efficiency have the board’s full support.
“CP has changed. Fred led that change. We have a multi-year plan that is working and delivering results,” he said in a statement.
Green, who joined the railroad in 1978, has said the 130-year-old company will not compromise principles for efficiency gains. Safe railways are cost-efficient and built on partnerships with suppliers and customers, he told Vancouver’s Board of Trade.
Some say that Green and CP, which is heavily exposed to a single large customer in miner Teck Resources Ltd, have scored better on customer care than CN.
When mechanical problems plagued potash marketing consortium Canpotex’s commodity-specific rail cars, Green “stepped up,” said Canpotex Chief Executive Steven Dechka. He helped resolve a crisis situation just as the federal transportation department was ready to pull the entire fleet off the rails.
Dechka, who gave 100% of Canpotex shipments to CP in 2002, moved an undisclosed minority portion to CN in January.
“It is in our interest to have two railroads, just from a security standpoint,” Dechka said. “We wouldn’t be back with them if Hunter was still there.”
At CN, Harrison’s efficiency drive meant tighter schedules and rigid discipline. Customers were told cargo arriving late would be left behind and if clients kept CN cars longer than agreed, they faced fines that Harrison did not hesitate to collect.
FALLING BEHIND THE PACE
CP had a long, comfortable life as Canada’s premier railroad, with CN viewed as a bloated, undisciplined government outfit, said James McClellan, a former strategic planner and head of mergers and acquisitions at Norfolk Southern.
But after CN was privatized in 1995, it went on an efficiency boot camp under chief executives Paul Tellier and Harrison, an experience that Ackman hopes to replicate at CP.
“CP will tell you there’s no way they can be as efficient as CN because they weren’t built as well and that is true. That doesn’t explain the gap in operating ratio,” said McClelland, a rail author who now lectures at universities.
To be sure, there are key differences at the two companies. CP, whose trains battle steeper Rocky Mountain grades, was built on a smaller budget than rival CN, which was forged into a single entity from several bankrupt railways by the federal government in 1919. But critics say Green must share at least some of the responsibility for CP’s failure to keep pace.
Known as an analytical, detail-oriented man who managed the railway’s head office move to Calgary from Montreal in 1996, Green is “smarter than hell”, McClellan said.
But critics say the avid outdoorsman, who loves to ski and play hockey, is also prone to changing his mind - undermining improvement plans that need time and focus to take hold.
MIXED REPORT CARD
In the five years it has been under Green’s leadership, CP has seen five heads of operations, three chief financial officers and a string of efficiency plans, Ackman said in his presentation.
“He’s had entirely too many chief operating officers in a relatively short period of time,” said Lawrence Kaufman, a former vice president at Burlington Northern who now writes about the industry. “You don’t get anything done.”
Green’s boldest move as CEO was the $1.48 billion US purchase of Dakota Minnesota & Eastern Railway in 2007, an acquisition that gets mixed grades from analysts.
The purchase gave CP access to lucrative markets in the booming U.S. Midwest, notably ethanol, but it came at a steep price and with a $1 billion option to push into the Powder River Basin to transport coal that has not been exercised.
“Is that worth the money they paid for it? I think it’s still a question mark. So far it hasn’t proved out, but that doesn’t mean longer term it doesn’t make sense,” said Edward Jones analyst Brian Yarbrough.
The same could be said of Green’s plan to resurrect CP, and some have already lost faith.
“I think he says a lot of the right things... Unfortunately he cannot translate those into results and so he can talk the talk, but he can’t walk the walk,” Yarbrough said.
“It’s great that he’s a nice guy, but at the end of the day, he’s paid to produce results and, unfortunately, he hasn’t.”